Wednesday, January 28, 2009

Rethinking the Stimulus

In fairness to all, the negotiations took place behind closed doors, leaving us little solid information on which to base opinions. And over the years, we’ve had good reason to be wary of backroom deals in Congress.

But there's good news. The American Recovery and Reinvestment Act is a remarkably “clean” bill. Only between 1½ and 3 percent is being wasted on tax cuts for business. Put another way, the bill is about 98 percent pure—money dedicated to good, progressive causes.

The Congressional Budget Office (CBO) analysis, released Monday, says the business tax cuts will cause “a net revenue loss of $13 billion over the 2009-2019 period.” See the discussion on pages 11-12 of this document.

As you probably know, the Senate Finance Committee intends to make larger business tax cuts than the House bill has. The analysis of the Finance Committee’s markup, evaluated by the Congressional Joint Committee on Taxation, is on page 3 of this document. The Senate version includes both the bonus depreciation and 5-year carryback provisions, but the Joint Committee estimates these will cost a total of $22.5 billion instead of the House’s $20 billion. The Senate does not include the $7 billion tax increase and adds a bit more than $2 billion more in tax breaks for a total of $24.9 billion in business tax benefits.

The CBO tells us that the whole bill costs $816 billion. So if the Senate version is adopted, only 3 percent of the spending is for business tax breaks. If the House version is adopted, it’s only 1½ percent. Either way, this is a bill that is between 97 and 98.5 percent targeted toward good causes.

This was written before the Senate added an alternative minimum tax (AMT) patch to the package, which will cost another $70 billion and target the middle to upper-middle class, and is not all that stimulative. The AMT patch is always an annual exercise in humiliation, as a patch is passed without any offsets, and that would likely be the case this year as well. But it tips the balance of tax cuts and spending on the package.

In addition, this bill is one of the rare chances to both create jobs and provide something lasting for the future, and even if you agree with Horn that only 15-20 billion is "wasted" (and I'm not totally convinced), it's wasted at the expense of an investment and a transformation.

Even though most House Democrats say they will back the plan, many reject the administration's argument, saying that infrastructure projects could easily be expedited, that the economy will need additional infusions for years to come and that the real reason for shunning infrastructure was to make room for tax cuts. Obama, with a public mandate to do something big, is missing a rare opportunity to rebuild the country, they say.

"Every penny of the $825 billion is borrowed against the future of our kids and grandkids, and so the question is: What benefit are we providing them? What are we doing for the country? It's the difference between real investment that will serve the nation for 30, 50 years and tax cuts, and that's a very poor tradeoff," said Rep. Peter A. DeFazio (D-Ore.). "I go to my district and people say, 'Yeah, I can use 10 extra bucks a week, but I would rather see more substantial investment.' We've gone through a couple bubbles that were borrowing and consumer-driven. We want a recovery that's solid and based in investment and productivity, and that points us at building things that will serve us decades to come."

Even some Republicans echo the call for more infrastructure spending, saying they would be more willing to support the bill if it showed more tangible and focused benefits, instead of being scattered across an array of existing programs. Rep. John L. Mica (Fla.), the ranking Republican on the transportation committee, called the proposed infrastructure spending "almost minuscule" and expressed regret that the administration had not crafted its plan around an ambitious goal such as building high-speed rail in 11 corridors around the country, which Mica said would cost $165 billion.

"They keep comparing this to Eisenhower, but he proposed a $500 billion highway system, and they're going to put $30 billion" in roads and bridges, he said. "How farcical can you be? Give me a break."

The fact that transit concerns don't have the money to currently meet increased ridership puts the lie to the idea that they couldn't use money quickly. And surveyors, urban planners, environmental impact studies, they create jobs too.

"I think it's a reasonably well-designed package," said Mark Zandi, the chief economist for forecaster Moody's Economy.com and a former adviser to the presidential campaign of Republican Arizona Sen. John McCain.

The key to the plan's success won't be its design, but its implementation, he cautioned, particularly the public works spending on roads, schools, ports and military bases.

"It runs the risk of turning into pork projects that are done more for political than economic reasons, but if it is well managed and run, it could" do much good, said Zandi, who's been a frequent expert witness before Congress as lawmakers drafted competing plans.

House Republicans have lampooned some modest spending provisions in the package that have little to do with stimulating the economy, but those measures account for only a small portion of the money.

Second, the aid for state governments is huge. Here in California, the state controller is delaying tax refunds indefinitely because the state is out of money. If the infusion of cash stops the states, which by and large must balance their budgets, from cutting spending in the midst of a recession, that's a big plus. Also, much of the spending targets the working poor and unemployed. Anti-poverty advocate Deepak Bhargava said that the bill is the "best piece of legislation for helping poor people he had ever seen."

Now, Republicans are just chipping away and collecting scalps, and they've been moderately successful, but in a really haphazard fashion. Yesterday, out of nowhere, conservatives started complaining about the lack of housing aid in the bill, which is rich for them. And check out what nutball Michelle Bachmann tried to pass as an amendment (it didn't make it through the Rules Committee) - requiring a state spending cap for any state that receives funds from this legislation, the kind that almost destroyed Colorado a few years back (Republicans are the party of state's rights). I'm not seeing a lot of strategy, just a general lurching from one outrage to the next.

Sadly, it's working. I guess the provision to refurbish the National Mall has been excised. From a raw policy standpoint, it's not a dealbreaker, but it shows a troubling trend where GOP hissy fits bear fruit. Democrats are plowing forward on this bill, but what happens with the next one? Who has the ear of the President? Democrats who want to cement legitimate progress? Or Republican know-nothings who appeal to elites to create firestorms? And the idea that this will buy Obama votes down the road for other liberal initatives borders on the insane.

If Horn is right and the bill is relatively pure, that's fine. But the politics have been anything but pure. Conservatives through their wailing have set up themselves to be proven right in the event of failure, because the argument was never made about progressive economic philosophy versus conservative failure. Instead we got a mix and let conservatives define the terms of the debate. Now Obama is beholden to whether or not the stimulus works. He always was, of course, but by pre-compromising the bill and offering what is still too imbalanced a package, he has made it more difficult to succeed than he needed to.

There is a silver lining. Instead of just whining on the Internets, Chris Bowers led an effort to get an amendment from Jerrold Nadler onto the calendar that would increase transit funding by $3 billion. It was hard-fought but now the full House will vote on it, and I urge you to call the Congressional switchboard at 202-225-3121 and ask your representative to vote "Yes" on the Nadler amendment to H.R. 1. In the face of Republican crankiness, we have the ability and the duty to be a louder and crankier voting bloc.